The Union Budget 2017-18 will be uniquely important in many ways. It will mark the
first time that Railway Budget would be merged into the Union Budget. Further, it
would also mark a departure from the past in terms of being presented on 1st of
February instead of the usual end-February. However, the topmost question on everyone’s
minds is how the erudite Finance Minister would handle the economy poised at intersection
of two mega ‘policy’ events – demonetization and GST implementation. And his task
could not be more onerous and momentous.

The economy needs a boost.

Demonetization has caused significant short-term disruption and there is a need
to provide a healing touch as well as to demonstrate the path for long-term gain.
Similarly, GST has the potential to catalyze economic rewards in the long term.
But the impending GST implementation will require considerable efforts to ensure
that short-term challenges do not clog the growth engine.

And to make the matters even more challenging, global political and economic environment
remains eerily uncertain given Trump’s recent election victory and Brexit scenario
still playing out.

The mood in the Indian economy was aptly captured in the recent Dun & Bradstreet
survey – the ‘Composite Business Optimism Index’, which stands at 31-quarter low
reaching 65.4 for Q1 (Jan-Mar 2017). This fall in the index when contrasted with
95.3 levels achieved just ahead of the 2014 elections, demonstrates the herculean
task facing the Finance Minister.

The need to induce growth is evident. The need for growth-inducing action through
the budget is also demonstrated in various economic indicators. Investment activity
has been underwhelming, and gross fixed capital formation declined by 3.2% during
Jul-Sep 2016.

Growth in bank credit has been slow for many quarters now, and reached a many-decade
low of 5.1% as on end-December2016. Worryingly, GNPA (gross non-performing advances)
ratio of SCBs increased to 9.1% in September 2016 from 7.8% in March 2016, pushing
the overall stressed advances ratio to 12.3% from 11.5%.

However, despite the challenges, there are some bright spots that the Finance Minister
could leverage to deliver a budget that revives the animal spirits in the economy.

Taxation

Tax proceeds following income disclosure scheme and demonetization could potentially
provide fiscal headroom for FM to allocate greater funds to rural sector as well
for infrastructure.

With GST on the horizon, the FM could use it as a policy opportunity to streamline
tax structures and introduce measures that help in ‘ease of doing business’.

The corporate sector is also looking for progress on the direct tax roadmap already
laid out by FM. In previous budgets, the FM indicated to reduce the Corporate Tax
rate from 30% to 25% while phasing out exemptions. With current corporate tax rate
incidence at 35% (including surcharge, cess, etc.), a definitive step towards lower
direct tax will encourage compliance and boost sentiment.

A clear schedule and detailing on GST implementation would also provide ‘tax & policy
certainty’ to the corporate sector that can catalyze investment activity.

Focus on MSMEs

The budget would have to attend to the concerns of the employment-generating MSMEs
segment. The budget should address simplification and rationalization of indirect
tax and service tax structure for MSMEs across sectors in line with movement towards
GST.

Some of the steps that could reduce the compliance and tax burden include streamlining
of the refund process, correcting inverted duty structures, and providing greater
clarity on reverse charge mechanisms.

Another point of interest would be the framework that budget ends up creating for
adjudicating ‘tax disputes’ concerning MSMEs following demonetizationdeposits. Needless
to say, a fine balance would have to be struck to ensure rightful tax compliance
while avoiding the ‘tax terrorism’ tag.

In keeping with the focus on tax compliance, budget should provide clear incentives
to MSMEs for adopting digitization and transparency.

In the ultimate analysis, as always, the FM would have to attempt a fiscal tightrope
of lowering tax rates and yet spending higher for driving growth and jobs.However,
the tax revenue scenario would be further influenced by GST implementation and the
aftereffects of demonetization, and the calculus could go in many directions. Whether
the FM can pull off an ‘ideal’ budget in these circumstances, only time will tell.
What looks likely though, is that Arun Jaitely’s 1st February 2017 speech will go
down as the “most-watched” budget in recent history!